Margin calls actually instigated the crash

By davidpetraitis, on June 1st, 2011

Hat tip naked capitalism. Blogger London Banker wrote a piece called Concentration, Manipulation and Margin Calls in which he makes a statement that has been going around in my head since the crisis and the collapse of Lehman’s:

In October 2008 the global financial markets crashed. The story in the media is that it was a panic caused by the insolvency of Lehman Brothers. This is not the truth – or at least not all of it. The crash actually followed a $2 trillion margin call by these four global banks on their prime brokerage clients and OTC counterparties – effectively a 30 per cent increase in required margin. It was the margin call that forced liquidation of global portfolios of all asset classes – and particularly the high quality, most liquid asset classes.

It was always clear to me that the collapse of Lehmans was two part, margin calls against it as its credit weakened and firms no longer willing to post Repos against Lehmans. The collapse of AIG was actually due, imho, to calls for repayment of CDS collateral as CDS spreads ratcheted skyward for large numbers of firms, such as Lehmans, which AIG FInancial Products had written protection for.